By Harry Simons
There are four main drivers within a hedge fund business: performance, distribution, growth and asset allocation. Growth is driven by hiring and acquisition of the best investment talent the market has to offer, but the issue of how to find and attract this talent is the million dollar question.
Historically, hedge funds have hired talent from a combination of banks and competitor funds in equal numbers. With the recent implementation of the Senior Manager Regime, the Volcker Rule and additional regulation and restrictions post credit crisis, traders in banks are no longer able to make the large speculative bets that they once did. Instead, they are expected to generate steadier returns and hedge funds have realised that this shift in mind-set brings with it additional risks. Many are preferring to target traders from competitor funds who have a proven track record of alpha generation rather than targeting traders in banks.
It is important to understand that hedge funds are looking for the star performers, those individuals whose calculated risks can change the course of the firm and generate significant returns for investors. Banks are no longer able to compete for the same talent as proprietary risk-taking has been curtailed, and the pay-outs of yesteryear have been curbed.
Hedge funds have realised that to attract the very best talent, they need to have a comprehensive and compelling story to offer potential recruits. As such we have seen funds adapt their entire platform: culture, company structure, team structure, risk systems, infrastructure support, capital allocations, strategic direction and pay-outs. There must be a trajectory in place for high achievers, and this must be unambiguous. The capability to trade the required financial instruments with the appropriate risk limits is also essential, since having the right mandate in a falling or volatile market can prove to be the difference between the winners and the losers.
Steve Cohen of Point72 recently announced at the Milken Institute Global Conference that he was “blown away by the lack of talent”1 applying to his hedge fund. However, high quality individuals are well looked after, possessing job security, a good track record, and in many cases, carry in the fund. Therefore, it is unlikely they will be looking actively for new pastures until something goes wrong. Ken Griffin has added to the debate during an interview at the SALT Conference in Las Vegas, and rightly pointed out that a proactive approach to hiring must be taken when identifying and acquiring these high performing individuals – “The best talent is talent you go out and find. You need to avoid adverse selection. The talent you want to hire is the talent you want to pull from someone else.”2 This ‘someone else’ will increasingly mean competitor funds or similar institutions, rather than banks.
Acquisition of talent from competitors has always been one source of growth, but in the coming years it will be a core focus for hedge funds. Attracting talent from competitors will be undertaken as part of a proactive, targeted campaign with the opportunity set and platform capabilities clearly communicated to market participants. Hedge funds that are suffering large redemptions, returning external capital, or becoming family offices will struggle to hold on to their most coveted portfolio managers, and should consider the effect of these short term flight risks. There will be fragmentation with marquee names forming their own boutiques, but the winners will be multi-strategy hedge funds that are able to offer diversity within investment mandates, an excellent platform, and a trajectory for driven individuals.